Time Decay

[longandshort]

You can try selling premium instead of buying premium. Credit spreads or Covered puts or calls. Time is your enemy only if you're a buyer of options.

Actually it depends where you are in terms of moneyness, hence why “time decay” is a misnomer. Probably came about due to all the fotm calls retail buys...

 

[JSOP]

I hate time decay. Trading options has killed me in the past. Should I give up on options? Or is there a way to trade that avoids time decay? If so, how? Just do verticals?

Time decay only kicks in when the actual market movement is not as large as what is expected. When the actual market movement is larger than what was expected, time decay goes out the door and delta and gamma takes over. So don't blame it on time decay, blame it on the stupid implied volatility and the underlying movement.

 

[anycolour]

Ok JSOP, thanks. If you are trading for a larger than expected market movement, what's the best way to trade options? ATM/ITM/OTM? Straight calls/puts? Duration?

Let me give a scenario, maybe it helps:

1 - (Expected movement) Expect gold futures /GC to go down from 1900 to 1800, big 100 point move down
2 - (Expected time) Expect /GC to fully move from 1900 to 1800 within a 90 day period.
3 - (Expected oscillation) A more rapid oscillation of price as it broke down from key support. Not as many spikes up.

Trading this /GC scenario via futures, if a short was held from 1900 to 1800 would yield $10k in profit.

How would you trade this scenario via options intelligently and in a superior way to futures?

Thanks

 

[Ninja]

Hello guys can someone help me to understand why time decay is higher at the money option? I need the intuition behind this. I understand the graph of the time decay but can understand the financial intuition behind.

To which extent do you understand time value and why it is highest for ATM options?


You may want to read these articles:

Time Value Definition - https://www.investopedia.com/terms/t/timevalue.asp

The Importance of Time Value in Options Trading - https://www.investopedia.com/articles/optioninvestor/02/021302.asp

Time Decay - https://www.investopedia.com/terms/t/timedecay.asp